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What Happened to the Real Tax Debate?

A version of this post originally appeared on the author’s blog.

Ari Fleischer weighs in:

You wouldn’t know this from President Obama’s rhetoric, but our tax system, according to a recent report by the Congressional Budget Office (CBO), is incredibly progressive. Consider: The top 1% of income earners pay an average federal tax rate of 28.9%. (See the nearby table.) The average federal tax rate on the top 20% is 23.2%. The 20% of taxpayers earning between $50,100 and $73,999 pay an average 15.1%, and so on down the line. The CBO report includes payroll as well as income taxes paid…

One reason our country is so divided is because the president keeps dividing us. If taxes need to be raised to fight a war or fund a cause, the president should ask everyone to pitch in. If the need is national, the solution should be national—and that includes all of us.

But that’s not how Mr. Obama governs. We learned during the 2008 campaign that he believes in spreading the wealth around. And recently we learned he doesn’t believe that successful people made it on their own. Without the government, the president tells us, job creators and entrepreneurs would not be able to make it in America.

It’s really the other way around. Without job creators and the successful, the government wouldn’t have any money. So next time Mr. Obama meets someone in the top 1% or even the top 20%, instead of saying they’re not paying their fair share, he should simply say thank you.

The best response to this I’ve seen recently is from Eduardo Porter, who in addition to making a compelling case for modestly high tax rates, outlines the history of the lower-taxes-damnit movement over the past forty years and explains the little-known but highly influential Laffer Curve:

Taxpayers always want to pay less to the tax man. Still, there’s nothing inevitable about low taxes. In the early 1950s, coming out of World War II, the top federal income tax rate exceeded 90 percent. In 1980, the top marginal rate was 70 percent for families making more than $215,400 — about $587,000 in current dollars. And these families pocketed a much smaller share of the nation’s income than they do now. Today, people earning over $200,000 a year capture more than a third of national income.

How we got from that country to this one — where President Obama’s attempt to raise the top federal rate to 39.6 percent from 36 percent sets off partisan warfare — had less to do with changing beliefs about fairness than with politics. By the mid-1970s, the Republican Party concluded it was probably more effective to counter Democrats’ Big Government platform as the party of low taxes than as the party of budget discipline.

Economics helped them make their case. The sharp fall in tax rates that brought us to where we are today was buttressed by an economic proposition that has guided policy ever since: that raising taxes could backfire and harm the economy along the way.

Legend has it the idea entered the political mainstream during a meeting in Washington in 1974 in which the economist Arthur Laffer demonstrated the principle to Donald Rumsfeld, chief of staff to then-President Gerald Ford, and Dick Cheney, an assistant to the president. He drew a curve on a cocktail napkin — now known as the Laffer curve — to illustrate how tax revenues would increase less and less as tax rates rose until they reached a point where any future increase reduced the amount of money raised.

The Laffer Curve argument against raising taxes above a certain threshold is an important one, and certainly one that has animated the tax debate in this country for the past 40 years, not to mention other high-tax countries. But it’s also, as Porter explains, a cheap ace card for conservatives who just want to shrink government and have no real regard for a revenue-maximizing tax code. At the very least, it seems to me, you have to try to push tax rates up like Britain did 2 years ago, see if you hit the Laffer limit, and then lower rates accordingly. You can’t just keep lowering and lowering and lowering the tax rate and hope that that’s going to spur growth.

Besides the policy implications, the intellectual progression is really interesting here as well. Basically it runs like this. In 1974, Arthur Laffer, a Yale BA and Stanford MBA/PhD in economics puts forth a groundbreaking theory about the non-symmetric relationship between tax rates and government revenue. Between 1979 and 2002, more than 40 countries — mostly high-tax countries in Europe and Asia — take note and begin to adjust their top PIT rates downward, fearing that they’ve pushed past the theorized Laffer Limit. Eventually, with the theory garnering broad appeal around the industrialized first-world, Peter Diamond and Emmanuel Saez, among other big names in the field, try to offer refinements and new insights, establishing the Laffer Curve as a significant achievement in economics, if not one that has been fully fleshed out or applied yet.

However, before any of this happens, it’s Laffer who, during a meeting at the White House, sketches out his theory on a napkin for two Gerald Ford staffers — Dick Cheney and Donald Rumsfeld — and a writer from the Wall Street Journal named Jude Wanniski. They see a moment of opportunity: if revenue doesn’t correlate directly with the top tax rate, they reason, then a concerted push could be made through political and media channels for lower and lower taxes for the wealthy. Within a few years, slashing taxes for the wealthy is the key economic initiative of President Reagan, then of President Bush, and then, after a brief hiatus in the 90s, of President George W. Bush. Subsequent to W’s presidency, it becomes the single most championed policy goal by the conservative elite, and its “merits” are serially expounded on the Op-Ed pages of the WSJ, often by Karl Rove, Ari Fleischer, and other former members and friends of the Bush-Cheney team.

Regrettably, but none too surprisingly therefore, the tax debate in this country has devolved into an endless series of jabs and recriminations about who’s getting shafted the most by current rates and who deserves better. Naturally, everyone has a different view on this. But the debate that began in 1974 with Laffer, unlike the current one, was based not in partisan gamesmanship but in a scholarly effort to break down the mathematics of a difficult and important problem: how to maximize government revenue given a complex, non-symmetric relationship between tax rates and revenue production. What began, in other words, as an attempt to address a macroeconomic challenge with global implications has since turned into a vacuous procession of finger-pointing and self-pity.

The problem is not just with conservatives who would like to see the top tax rate drastically reduced, though. The problem is that the debate is now framed by a false choice between big government and small government. Liberals support their case for high taxes on the rich by claiming that the revenues are needed to fill budget holes, promote equality of opportunity, and close the gap between rich and poor. Conservatives support their case for lower taxes on the rich by defending the role of wealth creators and the virtues of limited government. The Laffer theory cuts against both arguments. Contrary to what liberals would argue, Laffer casts mathematical suspicion on the notion that continuously raising the top tax rate is good for anyone, let alone the government’s balance sheet. And contrary to what conservatives would hold, Laffer shows that a top tax rate below (or absurdly below, as the case may be) the Laffer Limit equates to stunted revenues.

Applying theory to governance can be challenging even in the best of times, and in times like these it isn’t hard to see why the blame game has been a more appealing option for many. But questions about who to tax and how much, which will remain relevant for as long as there is a republic, must be rooted in a sober realization about the inevitability of taxation for all, a shared understanding of the goal, and hopefully some knowledge of the economic theories upon which many of the talking points depend. That’s why it has been so alarming to see this debate become less about how to tax and more about interrogating the institutional legitimacy of taxation. Once we go down that road, math and theory and civil debate really don’t matter anymore.

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